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Will “co-work” trend impact valuations?

Appraisal Institute publication offers wide-ranging views on subject

Co-working space may be changing the office market, one seat at a time. Co-working space may be changing the office market, one seat at a time.

If you work in one of a handful of cities, New York being the most notable, you could get the impression that co-working space is poised to topple the traditional office environment. WeWork sites and others of that ilk have sprouted all over the city, as have ads promoting these places.

These work-share spaces provide common and private work areas on a short-term basis and are equipped with all the latest office capabilities, including Wi-Fi and gourmet coffee. They are very popular with startups, media, and tech companies.

Active, but still a niche

But while co-working has grown significantly over the last ten years, the numbers overall remain modest in terms of percentage of total office space.

Citing a February 2018 study, “Shared Space: Co-working’s Rising Star,” by Yardi Matrix, the cover story of Valuation magazine’s first quarter issue notes that Manhattan already has 7.7 million square feet of co-working space, while Los Angeles has 3.7 million and Atlanta and Dallas/Fort Worth each have 1.5 million. Valuation is a publication of the Appraisal Institute, the Chicago-based professional association for real estate appraisers.

On a percentage basis, however, co-working space represents just under 1.75% of the nearly 450 million square feet of office space in Manhattan, and just over 1.50% of the total space in Los Angeles, according to a chart in the article based on Yardi Matrix data. Of the cities shown in the chart, Miami has the highest percentage of co-working space, at about 2.75%.

The Valuation article, “Working Together,” by Deborah Huso, gives a broad overview of the trend including a list of the leaders in the field—Regus, with 9.4 million square feet in the U.S., and WeWork with 6.5 million, are the two largest.

Citing a variety of sources, including appraisers based in New York, Chicago, and Boston, the article paints a picture of a market that varies city to city.

In Chicago, for example, Julie Whelan, head of occupier research for the Americas with CBRE, notes that co-working could soften the sector involving office space of 5,000 square feet or less because the “typical office lease terms can't compete with the short-lease terms, flexibility and immediate workspace solutions that co-working spaces provide.”

Whelan adds that “with so many people working remotely, companies no longer need space for every employee and are making leasing decisions accordingly.”

Valuations could be impacted

In Boston, Robert Maloney, MAI, says “WeWork has become a competitive landlord.” Maloney, who is senior director of valuation and advisory at Cushman & Wakefield in Boston, says “The co-working firm has started marketing large blocks of space on the sublease market, and tenants view these availabilities as legitimate competitive options.”

Maloney is quoted in the article saying that “from a valuation standpoint, shorter-term leases and higher tenant improvement allowances could increase cash-flow concerns and create greater tenant turnover” among traditional landlords impacted by the co-working trend.

The article points out, however, that some valuation experts believe the rapid growth of the co-working market will become saturated in the not too distant future. Others view the impact as longer term and often positive, because of the attraction of Millennials to shared work environments.

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